Operating Costs

Like most industrial companies, Caterpillar’s operating costs include depreciation. But we would like to separate depreciation from other operating costs, so we refer to the consolidated statement of cashflows to compute the operating costs without depreciation, as shown below:

As can be seen, operating costs have varied considerably over the past 5 years.

We also note that operating costs is an increasing function of sales (they have an R-square of almost 99%). This indicates a large, fixed cost component. Modelling this, and running a regression, we choose to model operating costs as a linear function of sales:

Costs = 3.833 + 0.7789 * Sales